First outlined by the Italian-born economist Piero Sraffa (1898-1983), own rate of interest was later coined by English economist John Maynard Keynes (1883-1946) in his General Theory. It is defined as the percentage change in a current commodity price compared with its known future price in the market.
Every commodity has its own rate of interest, be it oil, coal or wheat. Each of these can be affected by other commodity interest rates. Thus, future wheat production will be influenced by future oil prices.
P Sraffa, ‘Dr Hayek on Money and Capital’, Economic Journal, 42 (March, 1932), 42-53;
J M Keynes, The General Theory of Employment, Interest and Money (New York, 1936)
Interest, in finance and economics, is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct from a fee which the borrower may pay the lender or some third party. It is also distinct from dividend which is paid by a company to its shareholders (owners) from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs.
For example, a customer would usually pay interest to borrow from a bank, so they pay the bank an amount which is more than the amount they borrowed; or a customer may earn interest on their savings, and so they may withdraw more than they originally deposited. In the case of savings, the customer is the lender, and the bank plays the role of the borrower.
Interest differs from profit, in that interest is received by a lender, whereas profit is received by the owner of an asset, investment or enterprise. (Interest may be part or the whole of the profit on an investment, but the two concepts are distinct from each other from an accounting perspective.)
The rate of interest is equal to the interest amount paid or received over a particular period divided by the principal sum borrowed or lent (usually expressed as a percentage).
Compound interest means that interest is earned on prior interest in addition to the principal. Due to compounding, the total amount of debt grows exponentially, and its mathematical study led to the discovery of the number e. In practice, interest is most often calculated on a daily, monthly, or yearly basis, and its impact is influenced greatly by its compounding rate.
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